/Facebook%20headquarters%20sign%20by%20Greg%20Bulla%20via%20Unsplash.jpg)
Meta Platforms (META) stock looks cheap here, as its free cash flow (FCF) could rise. After all, DeepSeek's AI innovations could lower its AI capex spending or increase productivity. Meta's earnings results on the 29th may show its FCF could eventually be higher than otherwise projected.
META is up today at $671.43 and does not seem to have been hurt by yesterday's sell-off following DeepSeek's AI bombshell in the AI sector.
This may portend good news for Meta when it reveals its Q4 earnings results after the market closes on Jan. 29.
Here is the bottom line. Meta Platforms is a user of AI technology. If DeepSeek's new R1 model shows that AI innovations can be mined much more cheaply that would eventually lower the company's capex costs. Or it could provide more productivity.
How This Affects Meta's Free Cash Flow (FCF)
This is after the company recently said it would spend between $60 and $65 billion in AI capex going forward. I discussed how this affects META's stock price in my Jan. 13 Barchart article: “Meta Platforms Stock Could Be Cheap Here Ahead of Earnings - How to Best Play It.”
For example, look at the table below that I have put together:
It shows that if the company almost doubled its capex spending this year, it could still potentially have a higher FCF. This assumes that its operating cash flow margins also rise to 65% this year from 56.1% estimated in 2024. (Note that the Q4 OCF margins may be higher at 60%).
So, even though capex spending is expected to be $35 billion in 2024, even if it rises to $61 billion in 2025, the company could still generate $56 billion or more in FCF this year.
And now, with the innovations that DeepSeek has brought along, it's possible that this capex spending could either be lower or be more productive. That serves to raise Meta's FCF margins in the long run.
So, this is good for Meta Platforms stock.
What META Could Be Worth
The table below shows how META stock could be valued with its strong FCF.
For example, using a 2.75% FCF yield metric, which is the same as a 36.4x multiple, META could be worth over $2 trillion this year. This is 22.1% higher than its market cap today.
That could raise the stock price to over $819 per share, or 22% higher than today's price.
The bottom line is even with its higher capex spending, or maybe more productive AI spending, META stock could still be undervalued, despite the effects of DeepSeek's lower-cost innovations in AI investment.
Note this model could change dramatically based on what Mark Zuckerburg says during the Jan. 29 earnings release. For example, if Meta keeps its forecast of higher capex spending despite the DeepSeek cost-reduction implications, analysts will want to see whether operating cash flow (OCF) margins can sustain this.
For example, my model above assumes that the OCF margins this year rise from 56% of sales to 65% of sales. That implies that revenue will rise faster or costs associated with revenue fall dramatically.
The bottom line is that there is a way that META stock could still be worth more under the new DeepSeek AI cost innovations. After all, META is a user of AI innovations, not a producer or cost absorber of AI innovations.
